Uncovering Patterns of Informality and Skills in the EU Through Cluster Analysis

Abstract The informal economy remains a persistent structural challenge across European countries, closely linked to governance quality, socio-economic development and skill disparities. This study examines how informality relates to skills by combining four alternative estimates of the informal economy with a wide set of educational, digital and institutional indicators. Using Elastic Net regularisation, we identify the most robust determinants of economic performance and subsequently apply k-means clustering to classify 26 European countries according to their profiles of informality and skills. Tertiary education, regulatory quality, digitalisation and life expectancy emerge as recurrent structural factors. The results consistently reveal two clusters: one comprising high-capacity, high-skill, low-informality countries in Western and Northern Europe, and another including lower-skill, higher-informality countries in Southern and Eastern Europe. The study contributes new evidence to a relatively limited European literature on informality and skills, highlighting the need for more granular regional analyses to capture internal heterogeneity and better inform targeted policy interventions.